WTI And Import Crude Price Differentials Create Profit Margin Advantages For Mid Continent Refiners Over Coastal Peers; Imports Currently Trade At $10 Premium Over West Texas Intermediate
January 9, 2012 - The Wall Street Transcript has just published Oil and Gas: Refining, Independent and Major Integrated Report offering a timely review of the Energy sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Pavel Molchanov joined Raymond James and Associates, Inc., in June 2003 and began work as part of the exploration and production research team, becoming an Analyst in January 2006. He initiated coverage on the alternative energy sector in fall 2006 and the integrated oil and gas sector in mid-2009. Mr. Molchanov has been recognized in the StarMine top analysts survey, the Forbes Blue Chip Analyst survey, and The Wall Street Journal Best on the Street survey. He graduated cum laude from Duke University in 2003 with a B.S. in economics.
TWST: You wrote in your Q3 industry report that every U.S. refinery cannot be painted with the same brush. What are some of the key differentiators that investors should be aware of?
Mr. Molchanov: Well, for refining, the biggest theme in 2011 has been access to that cheap crude oil, West Texas Intermediate, WTI. And very simply, it's a matter of geography. So companies that have pipelines in the Mid-Continent region - which is to say, the Texas Panhandle, Oklahoma, Kansas - are inherently in a position to source cheap crude. And companies that have refining assets on the coasts - the West Coast, the East Coast and the Gulf Coast - are in a much tougher position when it comes to sourcing cheap crude because, generally speaking, they have to buy crude that's imported. And import crudes, as I said earlier, today are at a roughly $10 premium to WTI. This theme, which has been very dominant for U.S. refining in 2011, is not going to be nearly as important in 2012, though it will still have some significance.
TWST: Turning to gas, you lowered your 2011 estimate to $4.10. Would you tell us the factors that contributed to that decrease in your estimate and what's the outlook for 2012?
Mr. Molchanov: For 2011, of course, we are at the end of the year, so we know how gas turned out. Gas averaged right around $4 for the year. For 2012, our updated forecast is $3.50, and our bias is to the downside, because, quite simply, the supply glut in North America is unrelenting. It is just not getting better. And unfortunately, with supply growing as much as it has despite these low prices, there is simply no reason for prices to move higher. If we saw that gas producers are really hitting the brakes when it comes to production, then perhaps that would warrant a higher price in 2012, but we are just not seeing that.
Some energy investors that also look at alternative energy will know that right now there is a huge glut of solar panels because Chinese solar manufacturers have been aggressively pumping out panels despite a global supply glut. And we are seeing that exact same thing with North American natural gas. Companies are continuing to produce aggressively, and they are still drilling even though supply is out of control right now. And that's a recipe for continually low prices in 2012, and we think the bias to our $3.50 forecast is to the downside.
TWST: What are either the outstanding regulatory issues or governmental policies that, if they were to be resolved, would have the most significant impact on the sector?
Mr. Molchanov: Well, right now as we think about the United States, the major regulatory concern for oil and gas is permitting in the Gulf of Mexico. The moratorium on Gulf of Mexico deepwater exploration ended earlier this year, but even though it is officially over, permitting has been quite difficult. And that reflects the caution by federal regulators in the wake of the Macondo oil spill. As we get further away from the disaster in the Gulf, I suspect that permitting will become easier, and that will allow drilling to accelerate. But to be clear, we are not quite there yet. It has still been onerous for companies to get deepwater permits.
Overseas, the Middle East for obvious reasons remains the hot spot. In many of the countries that we are most concerned about, Western oil and gas companies, particularly U.S. oil and gas companies, do not operate for legal reasons or political reasons. So in Iran, for example, the nuclear situation certainly is a concern for the region and for the global oil market. But it does not directly affect U.S. oil and gas companies because they are banned from drilling in Iran and have been for many decades. But there are also countries where the political situation has a direct effect on U.S. companies there. I mentioned Egypt earlier, where Apache (APA) is one of the leading foreign operators. In Libya, the civil war just ended a few weeks ago, and the situation remains a bit shaky. Companies in Libya include Occidental Petroleum (OXY), ConocoPhillips, Marathon Oil (MRO) and Hess (HES).
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